Private Lending: A Versatile Lending Solution
Why is Private Lending Different?
Private lenders operate with greater flexibility compared to most traditional lenders and can tailor financial solutions to meet the specific needs of your clients. This flexibility offers options for businesses facing tightening credit conditions or those needing quicker access to funds than what traditional lenders typically provide.
Private Lending Trends
As economic conditions worsen, leading to an increase in American Taxation Office (ATO) debts and insolvency events, some SME customers may find themselves seeking alternative funding solutions.
At Thompson Financing, we have observed a growing need for business owners to access equity in their real estate assets to inject capital into their businesses. With inflation running high, and the cost of capital increasing over the last 18 months, business owners may be feeling the pinch.
Private lending provides an option for business owners seeking to improve cash flow in the short term. A benefit of private lending is the ability to capitalise interest repayments for the term of the loan, which can help businesses manage their cash flow.
What do Private Lenders Look for in a Deal?
One of the advantages of private lenders is their flexibility in approving loans. Compared to traditional lenders, private lenders often have a shorter approval process and consider a range of other factors such as the security being offered and its value, the intended use of funds, the borrower’s repayment plan and the viability of that plan.
While private lenders may provide a quicker access to funds, they still conduct due diligence such as credit checks, security research, court searches, verification of income, for example. However, the above points form the basis of what a private lender initially considers when deciding whether they can assist a borrower.
Best Practices for Brokers
While private lending can offer a solution to businesses that require more flexibility than banks typically offer, private lenders often charge higher interest rates compared to traditional lenders, which could increase borrowing costs. It is critical to understand who you are dealing with when engaging a private lender. Be prepared to do the necessary due diligence on the lender before recommending them to your client. Consider the following:
• Have you taken the time to meet with the lender?
• Does the private lender have a website or social media presence?
• Are they on your aggregator’s panel?
• Have you asked your colleagues in the industry about their experiences?
While the vast majority of reputable lenders aim to advance the industry, some could be out for personal gain. If a lender seeks a large up front “commitment fee”, be cautious and conduct your research!
Checklist for Brokers when considering an Offer from a Private Lender:
DO
• Do check if any early exit penalties apply
• Do confirm the private lender has funds available and how long it will take to settle
• Do confirm the default rate and what happens upon expiry
• Do check if a second mortgage triggers a default
• Do check who will be registered on Title
• Do confirm the offer you sign matches the loan documents
DON’T
• Don’t sign a letter of offer unless your client intends to proceed
• Don’t pay large upfront fees
• Don’t sign anything without confirming all the potential consequences and costs
• Don’t confirm loan details by phone, always confirm in writing
In Summary
A world of opportunity exists for brokers who wish to diversify their offering to clients outside of the residential market where bank credit is becoming less accessible due to the rapid interest rate rises. Commercial finance offers an opportunity for diversification and private lenders will continue to play an increasing role in this space. Their ability to provide flexible and tailored solutions for SME clients will help their footprint grow. However, private lending often comes with higher interest rates and shorter loan terms. It is crucial for businesses to seek advice from financial professionals to help them make informed decisions and ensure they are choosing the best option for their specific circumstances.
DISCLAIMER
This communication is prepared and issued by Thompson Financing group representing Thompson Financing Mortgage Fund Ltd ABN 51 161 407 058 AFSL 438659, ARSN 166 411 463 and Thompson Financing Wholesale Fund Pty Ltd ABN 45 622 106 692 AFSL 506255 and contains general information only without considering any persons’ objectives, financial situation or needs. The information, opinions and other material in this publication are of a general information only and the information is not and should not be construed as financial product advice. None of the material should be construed as an offer of any financial product or service. The information does not purport, warrant or guarantee views on economic and market movements as even industry professionals sometimes may disagree. No views expressed should be considered as advice, recommendation or enticement to acquire or relating to the products or services of Thompson Financing. All persons receiving this publication must engage in their own due diligence of the information as presented and should obtain independent financial, tax and legal advice when considering the information. Lending criteria, fees and T&Cs apply in relation to Thompson Financing loans. Thompson Financing accepts no obligation to correct or update the information or opinions expressed in it. Opinions expressed are subject to change without notice. No member of Thompson Financing accepts any liability whatsoever for any direct, indirect or consequential or other loss arising from any use of this material and/or further communication in relation to this material.